The Bearish Trend Continues to Develop

By George Leong, B.Comm. Published : October 12, 2005

Stocks saw increased selling last week on earnings and economic concerns. Take a look at the charts and you’ll see a precarious situation for stocks in the near term. The S&P 500 broke below 1,200 last Wednesday for the first time since July 8. The DOW may test support at 10,300, and the tech-laden NASDAQ is once again hovering dangerously around its key technical support at 2,100.

A closer look at the charts indicates caution in the near term. The DOW has declined below its short-term and longer-term moving averages (MA). The 20-day MA has broken below its 50-day MA, a bearish sign, and the index has also breached its 200-day MA at 10,532. The break is negative and, unless we see some oversold buying support, we could see a move towards 10,200.

On the tech side, the near-term technical signals are extremely bearish and signal more downside testing ahead. And, like the DOW, the index has broken below its 20-day MA of 2,140, which in turn has broken below its 50-day MA of 2,152. This is bearish and, if the index fails to hold at 2,100, we could see a test of the 200-day MA at 2,077.

On the small-cap side, the Russell 2000, which had been up nearly six percent this year, has been struggling in recent sessions. It is currently down just over one percent this year. The near-term technical picture is bearish. The index has fallen below its 20-day MA of 664, as well as its 100-day MA of 651. Further weakness could see a fall to the 200-day MA at 634.

As far as the broader market goes, the S&P 500 fell below 1,200, which is a key support level. Failure to rebound could see a move towards support at 1,160. The near-term technical signals are bearish, as the index has dropped below its 20-day MA of 1,123, along with its 50-day MA of 1,225.

In the upcoming sessions, watch the moving averages closely and you should get a sense of where the market is heading in the near term.